Archive for the ‘Wal-Mart’ Category

Friday Roundup

Friday, May 22nd, 2015

Roundup2Wal-Mart related, request for a new trial, scrutiny alert, and for the reading stack.  It’s all here in the Friday roundup.

Wal-Mart Related

Here is what Wal-Mart said in its recent 1Q FY2016 earnings call:

“FCPA and compliance related costs were approximately $33 million, comprised of $25 million for the ongoing inquiries and investigations, and $8 million for our global compliance program and organizational enhancements.”

Doing the math, Wal-Mart’s 1Q FCPA and compliance-related costs is approximately $516,000 in FCPA-related expenses per working day.

Over the past approximate three years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.  Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

While $516,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past six quarters have been approximately $563,000, $640,000, $662,000, $855,000, $1.1 million and $1.3 million per working day.

In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015  = $173 million.

FY 2016 = $33 million (overall projection of $160 – $180 million for entire year)

Request for New Trial

Carlos Rodriguez, an individual convicted in a Haiti Teleco-related enforcement action (the focus of the 11th Circuit’s “foreign official” decision) and currently serving a federal prison sentence, has requested a new trial in this recent pro se motion.  In pertinent part, the motion states:

“In the instant case, an essential element of the FCPA charges hinged on whether Defendant had knowledge of the scheme to defraud Teleco . The factual predicate the Government relied upon at trial for proving that defendant had knowledge of the scheme to defraud Teleco was Perez ‘s [a cooperating witness] testimony .

Defendant has obtained new evidence , a sworn and notarized affiidavit from James Dickey , Terra ‘s General Counsel. Mr. Dickey ‘s affidavit states that ”he was never at any meeting at Terra or elsewhere where the subject of bribes to Antoine as International Director of Halti Teleco were discussed . Had the word ”bribe” been used in my presence in connection with the resumption of service with Haiti Teleco or the reduction of payments to that company, at any time during my tenure as general counsel, I would have remembered it and I would have immediately shut it down.

The affidavit demonstrates that ”facts” or ”evidence” the Government relied upon to show that Defendant had the requisite knowledge did not exist, and that the basis for his testimony against Defendant would have been completely impeached if this had been available at trial. In as much as the affidavit addresses an essential element of the FCPA offense, there is a reasonable likelihood that this new evidence would have affected the judgment of the jury, and, therefore, at a minimum, a new trial is required pursuant to Rule 33.”

Scrutiny Alert

Affinia Group (a North Carolina based company involved in design, manufacture, distribution and marketing of industrial grade products and services, including extensive offerings of aftermarket parts for automotive and heavy-duty vehicles) recently disclosed:

“As previously disclosed, the Company has conducted a review of certain allegations arising in connection with business operations involving its subsidiaries in Poland and Ukraine. The allegations raise issues involving potential improper payments in connection with governmental approvals, permits, or other regulatory areas and possible conflicts of interest. The Company’s review, which the Company considers to be substantially complete, has been supervised by the Audit Committee of Affinia’s Board of Directors and has been conducted with the assistance of outside professionals. Affinia voluntarily self-reported on these matters to the U.S. Department of Justice and the U.S. Securities and Exchange Commission and has cooperated fully with the U.S. government. No determination may yet be made as to whether, in connection with the circumstances surrounding the review, Affinia may become subject to any fines, penalties and/or other charges imposed by any governmental authority, or any other damages or costs that may arise in connection with those circumstances.”

For the Reading Stack

An informative read here by Eric Carlson (Covington & Burling)  regarding the Chinese fapiao, a form of receipt that is often used in connection with various fraudulent practices.

*****

A good holiday weekend to all.

Wal-Mart’s Recent Disclosures

Monday, April 27th, 2015

Wal-MartLast week, Wal-Mart made several disclosures that touched upon its Foreign Corrupt Practices Act scrutiny and compliance enhancements.

This post highlights FCPA and related information in Wal-Mart’s Global Compliance Program Report  on FY 2015; its proxy statement; and its annual report.

Walmart’s Global Compliance Program Report on FY 2015

The report covers a number of topics including FCPA and related anti-corruption matters.

In its recent annual report, Wal-Mart disclosed spending approximately $220 million over the past three years in global compliance program and organizational enhancements.

This significant investment in FCPA compliance should be relevant as a matter of law in the future if a non-executive employee or agent acts contrary to Wal-Mart’s policies and procedures and in violation of the FCPA.  (See my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense“).

Compliance defense detractors say that such a defense will promote “check-a-box compliance” and a “race to the bottom.”

There is nothing “check-a-box” about spending approximately $220 million over the past threeyears on FCPA compliance enhancements nor can one credibly argue that if other companies follow Wal-Mart’s enhancements and approach that this is a “race to the bottom.”

The key policy issue is this.

Wal-Mart has engaged in FCPA compliance enhancements in reaction to its high-profile FCPA scrutiny.

Perhaps if there was a compliance defense more companies would be incentivized to engage in compliance enhancements pro-actively.

A compliance defense is thus not a “race to the bottom” it is a “race to the top”  (see here for the prior post) and it is surprising how compliance defense detractors are unable or incapable of grasping this point.

In the recent Global Compliance Program Report, under the heading “People,” the report states in pertinent part:

“Anti-corruption is a particular area of emphasis for our compliance program. During FY15, we continued to develop our internal anti-corruption resources. For example, we supplemented our anti-corruption leadership team by recruiting anti-corruption directors in the eCommerce businesses at Walmart.com.br (Brazil) and Yihaodian.com (China). Working with Walmart’s global anti-corruption team, these new directors conduct due diligence, develop and provide anti-corruption training, and oversee the implementation of anti-corruption policies and procedures.

Also in FY14, Walmart began to appoint teams of compliance monitors in each of our international retail markets. These monitors (known as Continuous Improvement Teams) regularly visit our stores, assess the effectiveness of our compliance controls at store level, train our managers and associates on proper compliance procedures, and assist the operators in correcting any issues identified. During FY15, the Continuous Improvement Team completed over 5,500 assessments at our retail locations, identified any deviations from our policies and processes, and collaborated with our store operators to correct over 90% of those issues by year end.

In FY15 we expanded this concept by beginning to carry out a multi-year plan to establish teams of compliance monitors focused on anti-corruption policies and our related financial controls. As with the existing Continuous Improvement Teams, these monitors are designed to constantly assess and improve our performance. We began the process of appointing these internal anti-corruption monitors in FY14 and the monitors conducted their first assessments in FY15.

In light of the progress in building our internal anti-corruption capabilities, in FY15 we transitioned to our internal staff a number of activities that external consultants had been handling. This increases the capabilities of our internal anti-corruption team, which is critical to the effectiveness and long-term sustainability of our anti-corruption program.”

Under the heading “Policies and Processes,” the report states in pertinent part:

“[I]n FY14 the company designed an enhanced global anti-corruption training and communication program to further define target audiences for anti-corruption messaging and to more effectively teach anti-corruption principles. This program came to life over the past year in several ways, including:

Developing simplified anti-corruption messaging for use in our stores in five key markets;

Providing anti-corruption training to our associates around the world in seven languages;

Delivering communications from business leaders in each international market regarding integrity and anti-corruption;

Enhancing the ways in which we track our anti-corruption training efforts; and

Expanding our anti-corruption training beyond our associates to include key third parties who do business with Walmart. In FY15, we provided anti-corruption training to third-party partners in 10 international markets.”

Under the heading “Systems and Analytics,” the report states in pertinent part:

“With many retail locations and associates throughout the world, we have a wealth of data available to help us anticipate and identify compliance risks. Efficiently collecting and utilizing those data can be a challenge. In FY14, the company launched an ambitious effort to develop and deploy a number of global systems to assist with this task. In FY15, the company spent more than $40 million USD carrying out this effort and made significant progress in installing and utilizing these technologies. This included technology to:

Conduct due diligence research on third parties that may interact with governmental entities on our behalf. The technology, for instance, collects information from the third parties about their businesses and key personnel; it then searches various databases to identify adverse news stories, litigation, government sanctions, and politically exposed persons relating to the third parties and their key personnel.

Centralize the oversight of our license and permit applications and renewals. In FY15, we extended a global license-management system into 11 of our international retail markets. The expanded management system organizes the licensing and permitting requirements in each market, simplifies the process for applying for licenses, and provides a single repository for documentation associated with our licensing obligations. Our associates now have critical licensing information at their fingertips, along with analytics to predict and prepare for our licensing needs.”

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In its recent proxy statement, Wal-Mart disclosed as follows.

“The Audit Committee held 15 meetings in fiscal 2015, seven of which related primarily to its ongoing FCPA-related investigation and compliance matters.”

[...]

“[E]ach member of the Audit Committee received an additional fee during fiscal 2015. Since 2011, the Audit Committee has been conducting an internal investigation into, among other things, alleged violations of the [FCPA] and other alleged crimes or misconduct in connection with certain foreign subsidiaries, and whether prior allegations of such violations and/or misconduct were appropriately handled by Walmart. The Audit Committee and Walmart have engaged outside counsel from a number of law firms and other advisors who are assisting in the ongoing investigation of these matters. This investigation continues to result in a significant increase in the workload of the Audit Committee members, and during fiscal 2015, the Audit Committee conducted seven additional meetings primarily related to the investigation. Audit Committee members also received frequent updates regarding the investigation via conference calls and other means of communication with outside counsel and other advisors. In light of this continuing significant additional time commitment, in November 2014, the [ Compensation, Nominating and Governance Committee] and Board approved an additional fee of $37,500 payable to each Audit Committee member other than the Audit Committee Chair, and an additional fee of $50,000 payable to the Audit Committee Chair. These additional fees may be received in the form of cash, Shares (with the number of Shares determined based on the closing price of Shares on the NYSE on the payment date), deferred in stock units, or deferred into an interest-credited cash account.”

*****

In its recent annual report, Wal-Mart disclosed as follows.

“The Audit Committee (the “Audit Committee”) of the Board of Directors of the Company, which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries, including Wal-Mart de México, S.A.B. de C.V. (“Walmex”), and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters.

The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance program through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). Since the implementation of the global review and the enhanced anti-corruption compliance program, the Audit Committee and the Company have identified or been made aware of additional allegations regarding potential violations of the FCPA. When such allegations are reported or identified, the Audit Committee and the Company, together with their third party advisors, conduct inquiries and when warranted based on those inquiries, open investigations. Inquiries or investigations regarding allegations of potential FCPA violations have been commenced in a number of foreign markets where the Company operates, including, but not limited to, Brazil, China and India.

The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have been filed by several of the Company’s shareholders against it, certain of its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers.

The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the on-going government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, debarment or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigations and review. In addition, the Company has incurred and expects to continue to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting the review and investigations. These costs will be expensed as incurred. For the fiscal years ended January 31, 2015, 2014 and 2013, the Company incurred the following third-party expenses in connection with the FCPA investigation and related matters:

WalMart Expenses

 

 

 

 

These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company expects that there will be on-going media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain audiences of the Company’s role as a corporate citizen.

The Company’s process of assessing and responding to the governmental investigations and the shareholder lawsuits continues. While the Company believes that it is probable that it will incur a loss from these matters, given the on-going nature and complexity of the review, inquiries and investigations, the Company cannot reasonably estimate any loss or range of loss that may arise from these matters. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.”

Wal-Mart Three Years Later

Tuesday, April 21st, 2015

Wal-MartThree years ago this week, the New York Times ran a major story (here) titled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle.”

The conduct at issue in the Times article related to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggested that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico. The April 2012 NY Times article resulted in intense world-wide media scrutiny of Wal-Mart.

However, it was known months before the NY Times article that Wal-Mart was under FCPA scrutiny.  (See here for the December 2011 post highlighting Wal-Mart’s FCPA disclosure). Thus, this week is a false three year anniversary of Wal-Mart’s FCPA scrutiny, but a meaningful anniversary nevertheless.

Three years ago this week, in response to the NY Times article, Wal-Mart’s stock dropped approximately 8%. For instance, the last trading day before the NY Times April article, Wal-Mart stock closed at $62.45.  A few days later, Wal-Mart stock closed at $57.36.

However, savvy investors should have recognized the NY Times induced dip as a buying opportunity because the market often overreacts (perhaps because of the plethora of suspect FCPA enforcement information in the public domain). Indeed, on the one year anniversary of the article, Wal-Mart stock closed at $78.29, on the two year anniversary of the article Wal-Mart stock closed at $77.66, and yesterday Wal-Mart stock closed at $78.14.

A December 2012 front-page NY Times article (see here for the prior post) added additional details to the previous April 2012 article, but did not change much from an FCPA perspective.

In the three years since the original NY Times article, Wal-Mart’s FCPA scrutiny has followed a fairly typical pattern.  Wal-Mart’s internal review has expanded beyond Mexico, civil shareholder suits and derivative claims have been filed, Wal-Mart has engaged in various remedial measures, and the company’s pre-enforcement action professional fees and expenses have skyrocketed.

As highlighted in this recent post, in the aggregate Wal-Mart has disclosed pre-enforcement professional fees and expenses as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015  = $173 million.

FY 2016 = $160 – $180 million (projected)

The above expenditures include compliance enhancements Wal-Mart has made (see here for the prior post).

As highlighted here, some are aghast at the mere mention of Wal-Mart’s high pre-enforcement action professional fees and expenses.  The response of some has been that Wal-Mart is a big company and “will survive its FCPA spending spree” plus it is “playing catch up for a decade of what appears to be FCPA neglect.”

Such statement wholly ignores other aspects of the New York Times reporting.

Indeed, the conduct described in the NY Times articles was unremarkable from a Foreign Corrupt Practices Act perspective – a view I have consistently held since April 2012 (see here for a prior post and here for my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”).

The unremarkable portion of the NY Times articles is that a foreign subsidiary of a major multi-national company operating in an FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits.  Even according to the NY Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments.

A November 2012 NY Times article (here) by David Barstow (the same author as the April 2012 and December 2012 articles) rightly noted that Wal-Mart’s investigation “was uncovering the kinds of problems and oversights that plague many global corporations.”  It was perhaps the most insightful thing the NY Times has said about Wal-Mart’s FCPA scrutiny, yet the November 2012 article received scant attention compared to the other two articles.

It is also interesting to ponder the salient question of whether the payments at issue in Wal-Mart, which are outside the context of procurement, actually violate the FCPA (and here, as in many cases, there is an important distinction between the law Congress passed and DOJ/SEC enforcement theories).  For instance, as noted in this prior post and in my above article, the government has an overall losing record in non-procurement type cases when actually put to its burden of proof.  However, as we all know, this will matter very little when it comes to any resolution of Wal-Mart’s scrutiny.

For all of the above reasons, I do not believe that Wal-Mart’s scrutiny “will test FCPA enforcement in new ways” as some have suggested.

Nor should it.

FCPA enforcement ought not be influenced merely by the fact that a talented journalist at a leading newspaper has devoted time and effort to cover an instance of FCPA scrutiny.  If Barstow and the NY Times would have focused on BizJet, the reaction likely would have been, and with good reason, more negative.  But then again, there probably would not have been any reaction at all because BizJet is obviously no Wal-Mart.  Insert [here] many other recent FCPA enforcement actions.  If Barstow and the NY Times would have focused on [that] instance of FCPA scrutiny, the story would have largely read the same.

Nor do I believe that Wal-Mart’s FCPA scrutiny will likely end up in the Top 5 FCPA enforcement actions of all time in terms of settlement amount.

The reason?

All of the cases in the Top 5 are procurement cases, not cases focused on licenses, permits and the like.

If Wal-Mart does indeed crack the Top 5 (and with the seeming “just because” escalation of FCPA fine and penalty amounts – see here - it is likely only a matter of time before a license, permit case does crack the Top 5), it will likely be for reasons unrelated to substantive FCPA issues, but rather an increase in the company’s so-called culpability score under the advisory Sentencing Guidelines based on its alleged handling of the potential FCPA issues in 2005.

But even here, the seldom-discussed November 2012 NY Times article, added additional relevant details.  It suggests that Wal-Mart’s December 2011 FCPA disclosure was motivated by Wal-Mart’s desire to pro-actively understand its FCPA risk (notwithstanding whatever may have occurred within the company in 2005 upon learning of potentially problematic payments in Mexico).  According to the article, Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods (like Wal-Mart, a company headquartered in Arkansas – see here for the prior post discussing the Tyson enforcement action).  According to the NY Times article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig to conduct the audit.

Throughout Wal-Mart three-plus years of FCPA scrutiny certain commentators have predicted that the Wal-Mart derivative actions would set a new standard for director liability.  They were once again proven wrong.  As highlighted here, the document request dispute in connection with a Wal-Mart derivative action in Delaware was much to do about nothing.  More importantly, as highlighted here, last month a federal court judge dismissed eight Wal-Mart shareholder FCPA-related derivative claims that were consolidated into one action.

FCPA scrutiny tends to last, on average, 2-4 years from the point of disclosure to any eventual enforcement action.  Wal-Mart’s FCPA scrutiny is thus now in the middle of this range.  However, it is not uncommon for FCPA scrutiny to last 5-8 years, thus it may be several more years before Wal-Mart’s FCPA scrutiny and its eventually outcome are know.

Court Dismisses Wal-Mart Shareholder FCPA-Related Derivative Claims

Thursday, April 2nd, 2015

DismissedIn the aftermath of Wal-Mart’s Foreign Corrupt Practices Act scrutiny, certain company shareholders (as is fairly typical in instances of FCPA scrutiny) filed derivative actions against various current or former Wal-Mart officers and directors alleging, among other things, breach of fiduciary duties.

By way of background as to derivative claims, the internal affairs of a corporation, such as the rights of corporate directors, are governed by state law.  State law, including most prominently Delaware law, provides directors broad discretion to manage the corporation subject to their fiduciary duties to the corporation and its shareholders.  A director’s fiduciary duties include the duty of care and the duty of loyalty, including its subsidiary component the duty of good faith.

A corporate director’s duty of good faith has evolved over time to include an obligation to attempt in good faith to assure that an adequate corporate information and reporting system exists.  In the notable Caremark decision by the influential Delaware Court of Chancery, the court held that a director’s failure to do so, in certain circumstances, may give rise to individual director liability for breach of fiduciary duty.

In Stone v. Ritter, the Delaware Supreme Court provided the following necessary conditions for director oversight liability under the so-called Caremark standard: (i) a director utterly failed to implement any reporting or information system or controls; or (ii) having implemented such systems or controls, a director failed to monitor or oversee the corporation’s operations. The court held that both situations require a showing that a director knew that they were not discharging their fiduciary obligations and courts have widely recognize that a director’s good faith exercise of oversight responsibility may not necessarily prevent employees from violating criminal laws or from causing the corporation to incur significant financial liability or both.

Derivative claims, such as those filed against Wal-Mart’s current and former officers and directors, are subject to unique pleading requirements.  Ordinarily, a company’s board of directors has the exclusive authority to institute corporate action such as filing a lawsuit on behalf of the corporation when it has been harmed.  However, when the harm to the corporation is the result of an alleged breach of fiduciary duty by the directors, the law recognizes that the board of directors is unlikely to sue itself in such a situation.  Thus, the law provides a mechanism for shareholders to bring a lawsuit, not in their individual capacity, but on behalf of the corporation to recover monetary damages for the corporation.

Because a derivative action usurps a traditional board of director function and can be subject to harassment and abuse, state law often requires shareholders to first make a demand on the corporation to file suit or to plead with particularity so-called demand futility, meaning that demand on the board would be futile because the board is incapable of making an independent judgment concerning the conduct at issue.

Most derivative actions, including those in the FCPA context, are brought as demand futility cases because if a shareholder makes a demand on the board of directors to bring the claim it will be assumed that the shareholder views the board of directors as sufficiently independent to analyze the claim and the board’s decision will be analyzed under the board-friendly business judgment rule.  To survive a motion to dismiss, a shareholder pleading demand futility must allege more than conclusory allegations regarding a breach of fiduciary duty.  Rather, the shareholder must allege with particularly facts suggesting that the majority of directors were interested; or that the directors failed to inform themselves; or that the directors failed to exercise due care as to the conduct at issue.

Those who predicted that the Wal-Mart derivative actions would set a new standard for director liability were once again proven wrong (see here for the prior post).

Earlier this week, in this order U.S. District Judge Susan Hickey (W.D. Ark.) dismissed eight Wal-Mart shareholder FCPA-related derivative claims that were consolidated into one action.

Judge Hickey summarized the shareholders allegations as follows.

“Plaintiffs allege that the Individual Defendants breached their fiduciary duties of loyalty and good faith by: (1) permitting violations of foreign and federal laws and Wal-Mart’s code of ethics; (2) permitting the obstruction of an adequate investigation of known potential (and/or actual) violations of foreign and federal laws; and (3) covering up (or attempting to cover up) known potential (and/or actual) violations of foreign and federal laws. Plaintiffs also allege that Individual Defendants violated Sections 14(a) and 29(b) of the Exchange Act by causing Wal-Mart to make false or misleading statements in its April 2010 and April 2011 proxy materials relating to annual director elections.”

After reviewing applicable Delaware law, Judge Hickey stated, in pertinent part, as follows.

“The Complaint consistently implies that Defendants should have or must have known about the alleged misconduct by virtue of their positions and the supposed reporting structure at Wal-Mart. According to Plaintiffs, “senior executives … knew about” the alleged misconduct, those “executives [were] required to regularly report to the Audit Committee of Wal-Mart’s Board,” and the Audit Committee, in turn, “was obligated to report on [this] to Wal-Mart’s full Board.” Plaintiffs allege that, given the “inference” that information concerning bribery was reported to Wal-Mart’s Board, Wal-Mart made a conscious decision not to act on this information.

Plaintiffs reference vague “decisions” made by Defendants but do not plead with particularity who made these decisions, how these decisions were made, or when the decisions were made. Plaintiffs generally allege that the Board made a decision not to act in response to evidence of criminal conduct. Missing from the Complaint are any particularized facts that link a majority of the Director Defendants to any actual decision. Plaintiffs point to no alleged meeting, discussion, or vote where the Board allegedly made one of these decisions. This lack of such particularized facts regarding a conscious decision about how or whether to respond to the alleged misconduct indicates that an analysis under Aronson is inappropriate.”

Elsewhere, Judge Hickey stated:

“According to Plaintiffs, nine Director Defendants knew about the wrongful conduct in 2005-2006 (the alleged bribery in Mexico and the internal investigation that allegedly concealed the wrongdoing) and either actively participated in it or acquiesced in it. Defendants argue that Plaintiffs have failed to sufficiently plead that a majority of the Board knew about or consciously ignored the alleged wrongful conduct in 2005-2006 and therefore cannot show that a majority of the Director Defendants face a substantial likelihood of personal liability. The Court agrees.

Nothing in the Complaint suggests any particularized basis to infer that a majority of the Board had actual or constructive knowledge of the alleged misconduct, let alone that they acted improperly with scienter. Plaintiffs’ allegations do not provide the particulars for what each Director Defendant knew, how he or she learned of the information, or when he or she learned of the information. Thus, as discussed below, Plaintiffs have failed to plead with particularity that at least eight Director Defendants face a substantial likelihood of personal liability so that their ability to consider a demand impartially would be compromised.”

[...]

“Courts may not impute knowledge of wrongdoing to directors simply because they serve on the board or because the corporate governance structure requires that notice of the wrongdoing reach the board.”

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In a footnote, Judge Hickey’s order states: “The Foreign Corrupt Practices Act prohibits United States companies from bribing foreign officials to secure improper business advantage.”

This is an inaccurate statement of law.

Rather, the FCPA contains an “obtain or retain business” element that must be proved.  Indeed, the DOJ’s position that the FCPA captures payments to “secure an improper business advantage” wholly apart from the “obtain or retain business” element has been specifically rejected by courts. (See here for the prior post).

The inaccurate statement of law in the order is perhaps not surprising given that the Judge referred to the FCPA as the “Federal Corrupt Practices Act.”

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For additional coverage of Judge Hickey’s decision – as well as its potential impact on current Delaware court proceedings arising from the same alleged facts – see here form the D&O Blog.

Friday Roundup

Friday, February 20th, 2015

Roundup2Wal-Mart related, north of the border, scrutiny alerts and updates, and an issue to watch.

It’s all here in the Friday roundup.

Wal-Mart Related

Here is what Wal-Mart said in its recent 4Q FY2015 earnings call.

“FCPA-and compliance-related costs were $36 million in the fourth quarter, comprised of $26 million for the ongoing inquiries and investigations, and $10 million for our global compliance program and organizational enhancements. For the full year, FCPA-and compliance related costs were $173 million, comprised of $121 million for the ongoing inquiries and investigations, and $52 million for our global compliance program and organizational enhancements. Last year, total FCPA-and compliance-related costs were $282 million.”

“In fiscal 2016, we expect our FCPA-related expenses to range between $160 and $180 million.”

Doing the math, Wal-Mart’s 4Q FCPA and compliance-related costs is approximately $563,000 in FCPA-related expenses per working day.

Over the past approximate three years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.  Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

While $563,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past five quarters have been approximately $640,000, $662,000, $855,000, $1.1 million and $1.3 million per working day.

In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015  = $173 million.

FY 2016 = $160 – $180 million (projected)

North of the Border

Yesterday, the Royal Canadian Mounted Police (RCMP) announced charges against the SNC-Lavalin Group Inc., its division SNC-Lavalin Construction Inc. and its subsidiary SNC-Lavalin International Inc.”  As stated in the release:

“The three entities have been charged with one count of corruption under paragraph 3(1)(b) of the Corruption of Foreign Public Officials Act and one count of fraud under paragraph 380(1)(a) of the Criminal Code.The alleged criminal acts surfaced as part of the ongoing criminal investigation into the company’s business dealings in Lybia.

The charges laid are the following:

In Montreal, Judicial District of Montreal, elsewhere in Canada and abroad

  1. Between on or about August 16, 2001 and on or about September 20, 2011, the SNC-Lavalin Group Inc., its division SNC-Lavalin Construction Inc. and its subsidiary SNC-Lavalin International Inc., did, in order to obtain or retain an advantage in the course of business, directly or indirectly give, offer or agree to give or offer a loan, reward, advantage or benefit of any kind of a value of CAN$47,689,868 or more, to one or several public officials of the “Great Socialist People’s Libyan Arab Jamahiriya” or to any person for the benefit of a public official of the “Great Socialist People’s Libyan Arab Jamahiriya”, to induce these officials to use their positions to influence any acts or decisions of the “Great Socialist People’s Libyan Arab Jamahiriya” for which they perform their duties or functions, thereby committing an indictable offence contrary to paragraph 3(1)(b) of the Corruption of Foreign Public Officials Act.
  2. Between on or about August 16, 2001 and on or about September 20, 2011, the SNC-Lavalin Group Inc., its division SNC-Lavalin Construction Inc. and its subsidiary SNC-Lavalin International Inc. did, by deceit, falsehood or other fraudulent means, whether or not it is a false pretense within the meaning of theCriminal Code, defraud the “Great Socialist People’s Libyan Arab Jamahiriya”, the “Management and Implementation Authority of the Great Man Made River Project” of Libya, the “General People’s Committee for Transport Civil Aviation Authority” of Libya, Lican Drilling Co Ltd, and the “Organization for Development of Administrative Centers” of Benghazi in Libya of property, money or valuable security or service of a value of approximately CAN$129,832,830, thereby committing an indictable offence contrary to paragraph 380(1)(a) of the Criminal Code.”

In the release, Assistant Commissioner Gilles Michaud, Commanding Officer of the RCMP’s National Division, stated: “Corruption of foreign officials undermines good governance and sustainable economic development. The charges laid today demonstrate how the RCMP continues to support Canada’s international commitments and safeguard its integrity and reputation.”

Upon being charged, SNC-Lavalin issued this release which states in full as follows.

“SNC-Lavalin was informed that federal charges have been laid by the Public Prosecution Service of Canada against SNC-Lavalin Group Inc., SNC-Lavalin International Inc. and SNC-Lavalin Construction Inc. Each entity has been charged with one count of fraud under section 380 of the Criminal Code of Canada and one count of corruption under Section 3(1)(b) of the Corruption of Foreign Public Officials Act. SNC-Lavalin firmly considers that the charges are without merit and will vigorously defend itself and plead not guilty in the interest of its current employees, families, partners, clients, investors and other stakeholders.

“The charges stem from the same alleged activities of former employees from over three years ago in Libya, which are publicly known, and that the company has cooperated on with authorities since then,” stated Robert G. Card, President and CEO, SNC-Lavalin Group Inc. “Even though SNC-Lavalin has already incurred significant financial damage and losses as a result of actions taken prior to March 2012, we have always been and remain willing to reach a reasonable and fair solution that promotes accountability, while permitting us to continue to do business and protect the livelihood of our over 40,000 employees, our clients, our investors and our other stakeholders.”

It is important to note that companies in other jurisdictions, such as the United States and United Kingdom, benefit from a different approach that has been effectively used in the public interest to resolve similar matters while balancing accountability and securing the employment, economic and other benefits of businesses.

These charges relate to alleged reprehensible deeds by former employees who left the company long ago. If charges are appropriate, we believe that they would be correctly applied against the individuals in question and not the company. The company has and will continue to fully cooperate with authorities to ensure that any individuals who are believed to have committed illegal acts are brought to justice. The company will also consider claims against these individuals to recover any damages the company has suffered as a result.

While the Public Prosecution Service of Canada and the RCMP have selected this as the next formal step in this 3-year old investigation, there is no change to the company’s right and ability to bid or work on any public or private projects.

Becoming a benchmark in ethics and compliance

Over the past three years, we have made significant changes to the company and remained focused on continuous improvements in ethics and compliance. The tone from the top is clear and unequivocal; there is zero tolerance for ethics violations. The individuals alleged to have been involved in past ethical issues are no longer with the company, and a new CEO has changed the face of the executive team. Under the leadership of the Board of Directors, the company has reinforced its Ethics and Compliance program with huge investments in time and money to rapidly make significant and concrete enhancements, including:

  • Creating the position of Chief Compliance Officer, who reports to the board, and hiring world-renowned leaders in compliance
  • Appointing an Independent Monitor recommended by and who reports solely to, the World Bank Group
  • Appointing compliance officers in all of the company’s business units and regional offices worldwide
  • Creating a dedicated Ethics and Compliance team
  • Further reinforcing internal controls and procedures
  • Further reinforcing its Code of Ethics and Ethics and Compliance Hotline
  • Producing a dedicated  Anti-Corruption Manual
  • Offering annual compliance training to all employees, with a special focus on those working in strategic roles
  • Developing and distributing a world-class Business Partners Policy to employees
  • Using an independent third party to screen candidates for senior management positions
Working hard to build a global leader in the engineering and construction industry

Over the past 3 years and while managing issues created by events prior to 2012, we have worked hard to develop and implement a strategy to become a global Tier-1 player and take our place in a consolidating industry. We have taken concrete steps towards a 5-year goal of doubling our size, and we continue to deliver on our strategy. A clear example is the acquisition of Kentz that added 15,000 employees to our oil and gas business, making us a Tier-1 player in this area.

Since 1911, SNC-Lavalin employees have been working with our clients to create world-class projects that improve people’s quality of life and provide value to our clients. We are the only Canadian player among the top engineering and construction firms in the world, ranking as the number one firm in both Canada and Quebec.

“I would like to thank our more than 40,000 employees, clients, shareholders, partners and other stakeholders for their trust and continuing support,” concluded Mr. Card.”

The portion of SNC-Lavalin’s statement highlighted above in bold and underlined is most interesting.

Scrutiny Alerts and Updates

Flowserve

In 2008, Flowserve Corporation and a related entity agreed to pay approximately $10.5 million to resolve DOJ and SEC FCPA enforcement actions concerning conduct in connection with the U.N. Oil for Food Program in Iraq.  As part of the SEC resolution, Flowserve agreed to final judgment permanently enjoining it from future violations of FCPA’s books and records and internal controls provisions.

Earlier this week, Flowserve disclosed as follows.

“The Company has uncovered actions involving an employee based in an overseas subsidiary that violated our Code of Business Conduct and may have violated the Foreign Corrupt Practices Act. The Company has terminated the employee, is in the process of completing an internal investigation, and has self-reported the potential violation to the United States Department of Justice and the United States Securities and Exchange Commission. While the Company does not currently believe that this matter will have a material adverse impact on its business, financial condition, results of operations or cash flows, there can be no assurance that the Company will not be subjected to monetary penalties and additional costs.”

Eli Lilly

In December 2012, Eli Lilly agreed to pay $29 million to resolve an SEC FCPA enforcement action based on subsidiary conduct in China, Brazil, Poland, and Russia.  At the time, there was no parallel DOJ action which sent a signal to knowledgeable observers that there would likely not be a parallel DOJ action.

Earlier this week, Eli Lilly made this official when it disclosed:

“In August 2003, we received notice that the staff of the Securities and Exchange Commission (SEC) was conducting an investigation into the compliance by Lilly’s Polish subsidiary with the U.S. Foreign Corrupt Practices Act of 1977 (FCPA). Subsequently, we were notified that the SEC had expanded its investigation to other countries and that the Department of Justice (DOJ) was conducting a parallel investigation. In December 2012, we announced that we had reached an agreement with the SEC to settle its investigation. The settlement relates to certain activities of Lilly subsidiaries in Brazil, China, Poland, and Russia from 1994 through 2009. Without admitting or denying the allegations, we consented to pay a civil settlement amount of $29.4 million and agreed to have an independent compliance consultant conduct a 60-day review of our internal controls and compliance program related to the FCPA. In January 2015, the DOJ advised us that they have closed their investigation into this matter.”

Rolls-Royce

As highlighted here, allegations have surfaced that Rolls-Royce “paid bribes for a contract with Brazilian oil firm Petrobras.” According to the report, “one of the Petrobras informants in the case, received at least $200,000 in bribes from Rolls-Royce, which makes gas turbines for Petrobras oil platforms.”

As noted in the report, “Britain’s Serious Fraud Office is separately investigating Rolls-Royce because of concerns over possible bribery in Indonesia and China.”

As highlighted here and here Rolls-Royce is also under investigation in the U.S. by the DOJ and in 2012 Data Systems & Solutions, LLC, a wholly-owned subsidiary of  Rolls-Royce Holdings, resolved an FCPA enforcement action.

U.K. Sentences

The U.K. Serious Fraud Office recently announced that “two employees of Smith and Ouzman Ltd, a printing company based in Eastbourne, were sentenced … following an SFO investigation into corrupt payments made in return for the award of contracts to the company.” As noted in the release:

Smith and Ouzman Ltd specialises in security documents such as ballot papers and education certificates.  Its chairman, Christopher John Smith, aged 72 from East Sussex, was sentenced to 18 months’ imprisonment, suspended for two years, for two counts of corruptly agreeing to make payments, contrary to section 1(1) of the Prevention of Corruption Act 1906, to run concurrently. He was also ordered to carry out 250 hours of unpaid work and has been given a three month curfew.

Nicholas Charles Smith, the sales and marketing director of the company, aged 43 from East Sussex, was sentenced to three years’ imprisonment for three counts of corruptly agreeing to make payments, to run concurrently. The company itself was also convicted of the same three offences and will be sentenced at a later date.

Both men were disqualified from acting as company directors for six years.

Director of the SFO, David Green CB QC commented:

“This case marks the first convictions secured against a corporate for foreign bribery, following a contested trial. The convictions recognise the corrosive impact of such conduct on growth and the integrity of business contracts in the Developing World.”

In passing sentence HHJ Higgins commented:

“Your behaviour was cynical, deplorable and deeply antisocial, suggesting moral turpitude.”

The briberyact.com published in full the Judge’s sentencing remarks.

Issue to Watch

This Wall Street Journal editorial was about Apple’s battle with its corporate monitor in an antitrust action.  While outside the FCPA context, the editorial nevertheless notes:

“Apple might have settled long ago as most corporations do, and that option might even have been cheaper than a protracted appeal. But the company is doing a public service by attempting to vindicate a legal principle and brake the growing abuse of court-appointed monitors and a crank theory of antitrust that will harm many more innovators if it is allowed to stand. If Apple prevails in the Second Circuit, it ought to sue Mr. Bromwich and attempt to disgorge the $2.65 million he has soaked from shareholders.”

*****

A good weekend to all.